As the end of the tax year looms, proactive investors will be looking at ways to maximise their tax-free allowances. For the brave, venture capital trusts (VCTs) offer investors the chance to protect thousands of pounds from the taxman's grasp – and potentially make double-digit returns.

Higher rate taxpayers who may or may not see their rate cut to 45p from 50p tomorrow, take note: last year, Foresight VCT returned 51pc, and Maven Income and Growth VCT grew 46pc.

What's more, these funds help support fledgling businesses in the UK, at a time when the economy is not best placed to aide such endeavours.

VCTs invest in companies that have assets worth £7m or less – although this threshold is rising to £14m next tax year – either at start-up stage, or when a small company is looking to expand.

These businesses are not listed on any markets, and their size means they can be very risky investments on their own.

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However, in order to dilute this risk, a VCT will provide capital to several companies, giving the investor a greater chance of making positive returns.

In order to compensate the investor for the obvious associated risks, there are tax incentives. Investors get 30pc income tax relief for the year they invest, and the capital growth is also tax free. Some VCTs also offer tax-free dividends.

You have to be invested for five years to qualify for the tax breaks, although as VCTs are listed, you can sell your shares before maturity. There is typically a minimum investment of between £3,000 and £10,000, and a maximum allowance of £200,000.

Adrian Lowcock of Bestinvest warned that despite the attractive tax incentives, VCTs were not suitable for everyone.

"Dividends paid by VCTs are not liable to any tax and there is no capital gains tax on selling. Combined, these tax benefits can be attractive for some investors, but not all. Bear in mind that most VCTs will be invested in small UK companies so they entail higher risk and can be expensive," he said.

"Make sure you understand the risks of VCTs before investing just to get the tax benefits."

Which VCT?

There are two types of VCTs – generalist funds and limited life VCTs. Limited or defined life funds state a certain investment period – six years, for example – at which point investors have to redeem their investment.

Mr Lowcock likes managers who have a strong track record in this area, such as limited life VCT Downing Planned Exit, which gives investors a fixed date when the managers aim to pay back their money, freeing it up for reinvestment elsewhere.

Generalist – also known as evergreen – funds allow investors to remain in the fund indefinitely.

As the start-ups grow, evergreen VCTs can "realise" their investments in holdings, and then this cash is reinvested into start-up schemes.

Patrick Reeve of Albion Ventures has been involved in VCTs since they were launched in 1995 by the then Conservative government as a way of injecting investor money into the much-needed small business market.

He advocates evergreen VCTs as part of longer-term financial planning, even for retirement.

"A lot of start-ups, especially in sectors such as technology, take a while to mature. To exit as soon as possible after the five years often means you miss out on the larger returns.

The majority of investors in our second ever VCT – launched in 1996 – are still invested. Their original cash has been reinvested up to four times in some cases, but they are mostly using the VCT as a source of income," he said.

"They either take the tax-free dividends or reinvest them to buy extra shares, on which they get another tax break of 30pc. The compounding effect of this type of investment means when they come to retire and cash in the pot, they will have made significant tax-free gains."

Ben Yearsley of Hargreaves Lansdown prefers these older evergreen funds. He said there are around half a dozen good providers – though many of them have already reached their quota for this 2011/12 tax year.

Matrix has raised only £7m of its £20m target so far, however, and it is on Mr Yearsley's buy list.

"I also like British Smaller Companies VCT," he said. "However, it is slightly more risky than Matrix as it invests in smaller, more early stage start-ups."

Although Mr Yearsley advocates a longer-term investment strategy where VCTs are concerned, in order to make the most returns, he did say that limited life fund Downing was a less risky choice. "It has a lower-risk structure, investing in asset-backed deals such as pubs and nurseries. Because of this you do get a lower rate of return, however. It is more a capital preservation approach."

Gordon Smith of stockbrokers Killik & Co said that in the limited life sector he liked Foresight Infrastructure VCT.

Though it is the first VCT from the infrastructure team at Foresight, it is an area they are extremely experienced in.

"The team will focus on Secondary PFI projects involving long-term, often index-linked contracts with strong counterparty backing," he said.

"In the generalist space, many of this year's offerings are top-up offers into pre-existing portfolios. This can in some circumstances be attractive, as new subscribers will get the immediate benefit of a mature portfolio without the lag of a new fund getting invested."